Housing: Behold the supply-side crash

It's a crash, but not as we know it,
writes Gavin R. Putland.

“This is the first weekend of the busiest four week period
ever in the Melbourne residential auction market,” said Enzo
Raimondo, CEO of the Real Estate Institute of Victoria, on Nov.21.
The weekend of Nov.14 was also notably busy, as were the second and
fourth of the five weekends in October. Meanwhile Australian Property
Monitors report that clearance rates fell into the 50s in late October
(Sydney) or early November (Melbourne).

Yet the bubble deniers — most
recently Shane Oliver
at AMP Capital — continue to cite a shortage of supply in
support of inflated prices.

A typical housing crash, as I have said many times, begins on the
demand side: sales fall first as buyers go on strike, and
prices fall later (and more gradually) as sellers are forced to adjust
their expectations. But no such adjustment should be needed when the
fall in sales is due to a pre-announced event, such as the withdrawal
of the First Home Owners' Boost (FHOB). Moreover, the timing of the
peak in prices — May 2010 — seems too late to be explained
by the withdrawal of the FHOB, but just right to be explained by the
second-latest rise in official interest rates. Similarly, the latest
downward step in clearance rates roughly coincides with the latest
rise in interest rates.

But even current clearance rates are higher than one would expect
in a context of flat or declining prices. So there's something else
tending to push prices down. And as I hinted
on Nov.11, I think it's on the supply side:

One possible explanation for the
seemingly anomalous peaking of prices is that after so many
bubble-bursts in so many countries, property owners have decided to
get out while the getting is good.

The following graph has been updated to reflect ABS figures on GDP
for the September quarter and housing finance for
October.†

Lending to individuals for acquisition of investment homes (purple
curve, second from bottom) and lending for acquisition of established
homes for owner-occupation (blue, third from bottom) both recovered
slightly in October. The continuing upward trend in weekly sales
figures (not to be confused with clearance rates) suggests that
November's lending figures will again show a rise. In contrast,
RP Data-Rismark reports that prices in October, although slightly higher than in
September, were still below the May peak. Since October, there has
been another fall in action-clearance rates, which are correlated with
price changes. The combination of rising volumes and declining
prices can be explained by a supply-side rush.

But whatever the explanation,
prospective buyers who observe the peaking or
“flat-lining” of prices will conclude that this is not the
time to buy. I would expect that realization to show up as a
renewed slump in lending, for both owner-occupation and investment, in
the near future. Then I would expect the usual sequence —
a slump in sales followed by a slump in prices — to reassert
itself with a vengeance.

__________

† The sources for the graph are
listed in the endnotes to
the post of Nov.11.